Financial statement analysis should focus primarily on isolating information useful for making a particular decision and therefore should concentrate on how you can make sense of a financial information. It involves comparing one item in the account with another closely related item .This report discusses the four main techniques used in interpreting a financial statement: Horizontal analysis, Vertical analysis, Trend analysis and Ratio analysis.
(Dyson, 2010) Interpreted horizontal analysis as a technique that involves making a line-by-line comparison of a firm’s account at a chosen period. We need to calculate the change from one year to another, for example Gross profit margin of Moule Ltd for the year 2011 was 19.0%, 23.5% in 2012 and 28.6% in 2013.This type of analysis focus on across row figures. Vertical analysis uses percentages to compare individual components of financial statements to a key statement figure usually restricted to profit and loss account and the balance sheet. Ratio analysis involves studying various relationships between different items reported in a set of financial statements. For example, net earnings (net income) reported on the income statement may be compared to total assets reported on the balance sheet.
Trend analysis is similar to horizontal analysis except that all figures in the first set of account in series are given a baseline of 100 and the subsequent sets of accounts are converted to that base line.
Stock turnover ratio is normally expressed as a number (eg.10 or 20 times) and not a percentage. The stock turnover ratio is calculated as Stock turnover = Cost of goods sold / Average stock. According to Moule Ltd.’s financial data, it’s stock turnover for the year 2011 was 15 times,16.9 times in 2012 and 15.5 times in 2013.This indicates the number of times, on average, that inventory is totally replaced during the year. (Dyson, 2010) Argued that the greater the turnover of stock, the more efficient the entity would appear to be in purchasing and selling goods.
Acid test ratio is a conservative variation of the current ratio. The quick ratio measures a company’s immediate debt-paying ability. It is calculated as follows: Acid test ratio = current asset - stocks / Current Liabilities. It is probably a better measure of an entity’s immediate liquidity position than the current asset ratio because it may be difficult to dispose of the stock in the short term. As Moule Ltd.’s acid test ratio for 2013 was 0.85 in 2012, this indicates that Moule Ltd.’s cash position is vulnerable compared to 2012 which was 1.10. (Atrill, 2010) Observed that it is not unusual for an acid test ratio to be below 1.0 without causing particular liquidity problems.
Return on capital employed (ROCE) is regarded as a key ratio by many businesses. It is the best way for assessing profitability of an entity. ROCE is calculated as follows: profit / capital x 100% = ROCE. (Atrill, 2010) Assess that the breakdown of the ROCE ratio highlights the fact that the overall funds employed within a business will be determined both by profitability of sales and the efficiency in the use of capital. In this case of Moule Ltd, its ROCE for 2011 and 2013 were quite low respectively 13% and 13.9% compared to 15.4% in 2012 .However Moule Ltd.’s operating profit margin may have caused its low ROCE in 2011 and 2013 and the ROCE can be high, provided that the asset are used productively.
The current assets ratio compares liquid assets (that is cash and those assets held that will soon be turned into cash) of the business with the current liabilities. It is calculated as follows: current asset = current asset / current liabilities
The concept behind this ratio is to ascertain whether a company's short-term assets (cash, cash equivalents, marketable securities, receivables and inventory) are readily available to pay off its short-term liabilities (notes payable, current portion of term debt, payables,